Different ways to obtain financing
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What are Sources of Funding?
Companies always seek sources of funding to grow their business. Funding, also called financing, represents an act of contributing resources to finance a program, project, or need. Funding can be initiated for either short-term or long-term purposes. The different sources of funding include:
- Retained earnings
- Debt capital
- Equity capital
Summary
- The main sources of funding are retained earnings, debt capital, and equity capital.
- Companies use retained earnings from business operations to expand or distribute dividends to their shareholders.
- Businesses raise funds by borrowing debt privately from a bank or by going public (issuing debt securities).
- Companies obtain equity funding by exchanging ownership rights for cash coming from equity investors.
Retained Earnings
Businesses aim to maximize profits by selling a product or rendering service for a price higher than what it costs them to produce the goods. It is the most primitive source of funding for any company.
After generating profits, a company decides what to do with the earned capital and how to allocate it efficiently. The retained earnings can be distributed to shareholders as dividends, or the company can reduce the number of shares outstanding by initiating a stock repurchase campaign.
Alternatively, the company can invest the money into a new project, say, building a new factory, or partnering with other companies to create a joint venture.
Debt Capital
Companies obtain debt financing privately through bank loans. They can also source new funds by issuing debt to the public.
In debt financing, the issuer (borrower) issues debt securities, such as corporate bonds or promissory notes. Debt issues also include debentures, leases, and mortgages.
Companies that initiate debt issues are borrowers because they exchange securities for cash needed to perform certain activities. The companies will be then repaying the debt (principal and interest) according to the specified debt repayment schedule and contracts underlying the issued debt securities.
The drawback of borrowing money through debt is that borrowers need to make interest payments, as well as principal repayments, on time. Failure to do so may lead the borrower to default or bankruptcy.
Equity Capital
Companies can raise funds from the public in exchange for a proportionate ownership stake in the company in the form of shares issued to investors who become shareholders after purchasing the shares.
Alternatively, private equity financing can be an option, provided there are entities or individuals in the company’s or directors’ network ready to invest in a project or wherever the money is needed for.
Compared to debt capital funding, equity funding does not require making interest payments to a borrower.
However, one disadvantage of equity capital funding is sharing profits among all shareholders in the long term. More importantly, shareholders dilute a company’s ownership control as long as it sells more shares.
Other Funding Sources
Funding sources also include private equity, venture capital, donations, grants, and subsidies that do not have a direct requirement for return on investment (ROI), except for private equity and venture capital. They are also called “crowdfunding” or “soft funding.”
Crowdfunding represents a process of raising funds to fulfill a certain project or undertake a venture by obtaining small amounts of money from a large number of individuals. The crowdfunding process usually takes place online.
Related Readings
Thank you for reading CFI’s guide to the Different Funding Sources. In order to help you become a world-class financial analyst and advance your career to your fullest potential, these additional resources will be very helpful:
FAQs
Examples of Source of Funds
A legitimate example of a source of funds can include anything where the money was obtained through legal means, such as: wages, bonuses, dividends, and other income from employment. pension payments. interest from personal savings.
What do you say when looking for funding? ›
What to say when you're asking for money: 5 tips to help you secure business funding
- Describe yourself in their words. ...
- Tell them how you will advance their agenda. ...
- Find the perfect length for your application. ...
- Get your numbers right. ...
- Take feedback with open arms.
The main sources of funding are retained earnings, debt capital, and equity capital. Companies use retained earnings from business operations to expand or distribute dividends to their shareholders. Businesses raise funds by borrowing debt privately from a bank or by going public (issuing debt securities).
How do you explain a funding request? ›
Clearly state the purpose of your funding request. Explain why you need financial support and how it aligns with your organization's goals and objectives. Be specific about the project or program you are seeking funding for.
What is my source of funds? ›
Source of funds refers to the origin of the money used in a specific transaction or business relationship. It answers the question, "Where did the money for this transaction come from?" Essentially, it is the activity, event, or circ*mstance that generated the funds involved in the transaction.
What is the answer to source of funds? ›
Typical sources of funding include wages from a job, investments, loans, inheritances, and profits from a business. SOW refers to how an individual's total fortune has been acquired and is legitimate. It focuses on comprehending the causes of riches and the actions that fueled its expansion.
How to answer questions for grants? ›
Explain which activities your organization has chosen and why, as well as when it plans to meet its goals and objectives. Don't forget to bring up behind-the-scenes aspects of the work, like staff training or client selection. If you aren't asked to include a project timeline elsewhere, include it here.
How to write a funding statement? ›
Funding statements
The author(s) disclosed receipt of the following financial support for the research, authorship, and/or publication of this article: This work was supported by the Medical Research Council [grant number xxx]. Multiple grant numbers should be separated by commas, multiple agencies by semicolons.
How do you explain funding? ›
Funding is the act of providing resources to finance a need, program, or project. While this is usually in the form of money, it can also take the form of effort or time from an organization or company.
What is a funding source? ›
A funding source is a bucket of funds that feeds one or more budgets. The combination of a funding source and budget is referred to as a complex budget. A single funding source can serve multiple budgets as well as multiple programs.
The Federal Register provides access to a wide range of Federal benefits and opportunities for funding. Grants.gov is a central storehouse for information on over 1,000 grant programs and provides access to approximately $400 billion in annual awards. It allows you to FIND and APPLY for federal government grants.
Which source of funding is most desirable? ›
Some of the best places to look for funding are retained earnings, debt capital, and equity capital.
How to write a motivational letter for funding? ›
Your motivation letter will describe your relevant experience, highlight your strengths, and propose future work to show the reader why you deserve the award. This will be your chance to define your goals, explain what you plan to achieve, and show your potential. They usually range from 400 to 700 words.
What is a source of funds request? ›
We are required by the anti-money laundering legislation to check where the money is coming from to buy the property. This can be from savings, mortgages and gifts from relatives, inheritances etc, and this is called a “source of funds” check.
How to write funding requirements and source? ›
Writing a Funding Request
- Business Summary. A business summary is only required in cases when a funding request is being created as a standalone document. ...
- Amount Required. ...
- Future Plans. ...
- Financial Information. ...
- Terms. ...
- Target audience's perspective. ...
- Accuracy. ...
- Consistency.
Source of funds is defined as the origin of the money used in a particular transaction. If your customer makes a purchase, what account did their funds come from?
What does it mean to source for funds? ›
Source of funds means the origin of the funds involved in a business relationship or occasional transaction. It includes both the activity that generated the funds used in the business relationship, for example the customer's salary, as well as the means through which the customer's funds were transferred.
What is an example of a funding source statement? ›
Examples of Funding Statement: "The research leading to these results has received funding from the PROJECT titled "AAA" in the frame of the program "BBB" under the Grant agreement number NNN." "This work was supported by the INSTITUTION (Grant agreement number NNN).
